Economic Uncertainty – Are We in a Global Property Bubble?
The United Kingdom, United States of America, China
The United Kingdom
Average UK property values rose by 8.2% in the 12 months to August 2022, a slight decline on the annual growth rate recorded the previous month, according to house price data from Zoopla.
While housing activity remained stable during the summer, the recent increase in mortgage rates for new borrowers will be the most crucial element for the property sector in the autumn. Rising interest rates are filtering quickly into higher mortgage costs, just as households weather the sharpest drop in real disposable incomes since records began in 1947, off the back of surging inflation and rising taxes.
Wealthy, older homeowners drove the surge as they chased disappearing cheap mortgage deals amid a chronic shortage of properties for sale. Experts warned the longer house price growth continues at this pace, the more unstable the market will become.
Back in March 2022, Andrew Wishart, of Capital Economics consultants, said: “With house prices continuing to rise apace, the risk of a more dramatic correction is growing.”
But the affordability crunch is hitting buyers on the bottom rungs of the housing ladder hard. Analysts warned the boom would cool fast as the cost-of-living crisis sets in.
The mini-Budget highlighted the government’s intentions for a big package of tax cuts to be paid for with fresh borrowing, causing lenders to withdraw hundreds of mortgage products due to worries of future sharp rate increases.
Zoopla says that, if interest rates on mortgages reached 5% by the end of this year, a homebuyer’s potential purchasing power would be reduced by as much as 28%, assuming that a buyer wanted to keep his or her monthly home loan repayments unchanged.
Mortgage interest rates might reach 6% by early 2023, according to some predictions. The squeeze on household incomes is set to intensify, with inflation at record levels and skyrocketing energy bills.
United States of America
As we all know, millennials are the most economically cursed generation. Now that they’re hitting their 30s and 40s, they’re not even cool anymore. And the housing market might be about to kick them where it hurts once again.
Millennials were finally buying houses after years of being side-lined by such catastrophes as the dot-com bubble bust in 2000, Sept 11th, two long geo-political wars, the housing financial crisis of 2008 and its jobless recovery, a global pandemic and now the ongoing, geo-political Russia/Ukraine war (phew!).
But, what if it’s actually just another trap for the broke generation? Americans think this is the worst time ever to buy a house, according to a recent poll. Interest rates are rising, and housing affordability is approaching rock bottom whilst rents are climbing.
Federal (national) debt is nearly $31 trillion at the end of Sep 2022. Any increase in interest rates raises the level of debt and interest payments become unmanageable very quickly. These huge increases in debt to income (GDP) cannot be sustained. In 1980 the US debt to GDP ratio was 34.67%, today the ratio stands at a whopping 124.62%. Add to this heady mix, increasing high inflation, cost-of-living crisis, stagnant or even diminishing growth, devaluing currencies, Russia/Ukraine war impact on energy and commodity prices and ongoing fears of more lockdowns! – and we haven’t even mentioned the state of the economy in China.
China’s Property Boom – Evergrande Group
China v the USA
China can build a hospital in 10 days, with a 2nd hospital almost completed, while it took the city of San Francisco 10 years to approve a new bus route! California has spent 20 years planning a rail network where China has spent 20 years building the largest rail network in the world!
China – Real Estate
For nearly 25 years China enjoyed a huge property boom as Chinese workers migrated from the suburbs to the inner-city factories as global demand for cheap consumerism kept rising in line with increasing foreign wealth. All these workers needed city apartments which needed to be built. So, in 1997/98 The Evergrande Group began building not only apartment blocks but entire cities to house the mass influx of workers. With domestic and foreign financial banks/institutions eager and willing to finance the projects The Evergrande Group grew from nothing to over $150 billion in just 10 years! The biggest, fastest ever rise of a Chinese company. Chinese workers raced to own their new, as yet unbuilt apartments, paying deposits whilst many paid in full with the support and backing from the Chinese government. During the 2008 financial crisis, China stimulated its economy with 4 trillion yuan, giving access to cheap and easy credit. Evergrande seized the opportunity and translated its land holdings into collateral for further financing, then acquired more land, more collateral, more financing and so the cycle kept repeating ad infinitum because no one believed that the Chinese government would ever allow their domestic property market to crash without intervention – Therefore, debt-fuelled rapid expansion! Fast forward to 2015 and Evergrande is the largest property developer in China by sales!
When Debt Becomes Unsustainable
At about the same time (2015/16) the economic sentiment in China completely shifted 180 degrees so that reducing national debt became governmental, fiscal policy. Not only did China accumulate huge debt but how quickly that debt was accumulated was a real concern. So, inevitably Evergrande became illiquid. We not only had half-built and empty apartment blocks but whole cities, newly built bridges and roads which lead to nowhere. China’s real estate sector accounts for about 30% of the country’s US dollar-denominated bonds (debt). Then in 2020, the Chinese authorities drafted the ’3 red lines’ metric which all developers would have to meet for further loans. Of China’s 30 largest property developers 14 had breached at least one of the new metrics. In September 2021 Evergrande ran out of money and faced a liquidity scare. They finally defaulted on 9th December 2021 getting very, very close to a debt restructuring programme. Meanwhile, the governor of China’s central bank announced that they would not bail out Evergrande. A group of Evergrande’s offshore bondholders said in a 20th January statement that the developer has failed to substantively engage with them about restructuring efforts and the group will “seriously consider enforcement actions”. Then in a 24th January statement, Evergrande posted on its website that it is currently drafting a detailed restructuring plan. The company urged patience with the offshore bondholders. Two days later on 26th January, they announced a preliminary restructuring in six months’ time. According to Refinitiv Data, real estate developers in China have a huge $117 billion worth of debt maturing this year (2022). Beijing has resorted to ‘pushing’ state-backed property developers and government-owned companies to buy some of Evergrande’s assets.
The China Evergrande Group is now all too well recognised as the poster child for the country’s economic difficulties. House prices in China have decreased in each of the 12 months following Evergrande’s now prophetic warning, with Xi Jinping’s administration poised to pour billions of dollars into a housing market that analysts say is fast becoming a massive Ponzi scheme.
According to official estimates, new home prices in 70 Chinese cities declined by a worse-than-expected 1.3% year on year in August, highlighting a volatile year in which China’s housing industry has gone from an unstoppable generator of development and wealth to being the main threat to the world’s powerhouse economy.
According to Citigroup analysis released this week, over a third of all property loans are now classified as bad debts – 29.1%, up from 24.3% at the end of last year – with once-safe state-owned property developers driving the growth.
The Chinese government’s pledge this week of 200bn yuan (£26bn) to kickstart investment was judged by analysts to be well short of what was needed.
The rating agency S&P said at least 800bn yuan would be needed – or even 10 times that much in the worst-case scenario – to rescue a property market in which prices have fallen, sales have slid, developers have gone bust and buyers have staged an unprecedented and widening mortgage boycott in protest at having paid largely upfront for homes that have not been finished.
The market is experiencing a total collapse in confidence, analysts say, and only government intervention can save the day.
Final Thoughts
Dr Marco Metzler from Deutsche Markt Screening Agentur (DMSA) warned that the collapse of the company (Evergrande Group) could spark the crash of the World Financial Market. He told The Express: “This is the first domino of the collapse of the market. It will be even worse than the 2008 financial crash. The market is much bigger than the American market.
Ninety million people could be housed in China’s empty properties.
The collapse of Evergrande will have a huge impact on the job market as they employ over 200,000 staff and hire 3.8 million people every year for project developments.
Is The Evergrande Group the catalyst for the inevitable collapse of the Chinese financial system? Evergrande owes over $300 billion – to banks and non-bank financial institutions (remember Blackrock?), domestic and international bondholders, suppliers, and apartment buyers. It has bank borrowings of $90 billion, including to Agricultural Bank of China, China Minsheng Banking Corporation and China CITIC Bank Corporation. (reports have 128 banks with exposure). Thousands of suppliers are on the hook for $100 billion. Evergrande has 1,300 projects in over 280 cities.
Compound these metrics with Europe in financial turmoil, mismanagement, chaos, and reactionary measures coming out of the Bank of England with the US Federal Reserve strangling their own economy (interest rates!) which is the largest in the world.
Who said, “Safe as Houses?!”
First published by Digital Zeitgeist on 30/03/2022, updated on 29/09/2022
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